Can I Deduct Money Paid Into Employee Retirement?

by Leslie McClintock, studioD

In most cases, you cannot take a an itemized deduction on money paid into employee retirement plans, such as defined benefit pension plans and 401k and 403b plans. This is because with salary deferral plans, the money is not taxable income in the first place. Since you are not declaring the portion of your compensation that goes into the plans as taxable income, there is nothing against which to deduct contributions.

Tax Treatment of Retirement Plan Contributions

Workplace plan contributions, such as those in 401ks and employee contributions to 403b tax-deferred annuity plans, get removed from your paycheck before you have control of the money, or "constructive receipt." They do not show up on your W-2 form as wages, tips, salary or other compensation. Instead, they will show up in a separate box on your W-2, already subtracted from your wages.

Tax Deferral

Once the money has entered a qualified retirement plan, the assets grow with no tax due on interest or on capital gains throughout your working life. You do not pay the income tax on these funds until you begin taking the money out to live on in retirement. You cannot defer the taxes forever, however; you must begin making taxable withdrawals, or "required minimum distributions," by April 15th of the year following the year in which you turn 70-1/2.

Business Owners

If you are a business owner and you are making contributions to a workplace retirement or pension plan, such as a SIMPLE, SEP IRA, or matching contributions to a 401k plan, your cash contributions are generally fully deductible as a business expense.


Workers seeking additional tax deductions may consider funding a traditional IRA, or individual retirement arrangement, provided they meet the income thresholds to qualify for the deduction. If they do not, they may make non-deductible contributions and still benefit from tax deferral on the growth, and also from up to $1 million in creditor protection provided for IRAs under federal law.

Payroll Taxes

Although 401k and 403b deferrals are not counted as taxable income for the purposes of computing income tax, they are considered taxable income for the purposes of computing payroll taxes, including Social Security and Medicare tax.

About the Author

Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.

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